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Euro Soars as EU Officials Reach Deal on Second Greek Bailout

By , Currency Strategist
21 February 2012 06:08 GMT

The Euro shot higher following news that Eurozone finance ministers reached a deal on a second Greek bailout package. The markets have been anxiously awaiting an accord to prevent a default that could have occurred as soon as March 20 when a large tranche of expiring debt totaling €14.5 billion is due to be repaid.

As widely expected, the package is valued at €130 billion and aims to trim Greek debt to 120.5 percent of GDP by 2020. Private-sector bondholders will accept a 53.5 percent “haircut” (i.e. losses) on their holdings of Greek debt, up from the 50 percent envisioned in October.

Turning to the public sector, the arrangement envisions a scheme whereby the ECB will transfer profits it made on Greek securities to national governments, who will subsequently have the option to pass them on to Athens. Additionally, any national central banks owning Greek debt have committed income generated from holding them toward Greek debt reduction.

Notably, the bailout is linked to stiff conditions that Greece must meet on an ongoing basis to ensure the flow of funding continues through 2014 as intended. This includes:

  • Additional budget cuts totaling €325 billion
  • The creation of a “segregated account” where Athens must deposit the coming quarter’s debt service costs to be disbursed by a third-party agent, and
  • The establishment of a “legal framework” enshrining priority for debt servicing into the Greek constitution.

To ensure that Greece is adequately keeping up with its obligations, the so-called “troika” of the EU, the ECB and the IMF will establish a permanent presence on the ground. The statement following the meeting seemingly went out of its way to stress that funding will be made available “provided policy conditionality…is met on an ongoing basis,” meaning any dithering on the part of Athens to move forward with their end of the bargain can see the arrangement unravel.

Euro_Soars_as_EU_Officials_Reach_Deal_on_Second_Greek_Bailout_body_eurusd15m.png, Euro Soars as EU Officials Reach Deal on Second Greek Bailout

15min Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow him on Twitter at @IlyaSpivak

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21 February 2012 06:08 GMT